Thursday, May 30, 2013

Ed Miliband could transform the UK economy and his electoral prospects at a stroke by adopting radical tax reform policies.

The thought occurred to me during the Labour Leader’s spat with Google over its policy of routing profits to low tax Ireland. Miliband attacked Google’s legalistic defence, proposing tougher rules and increased international cooperation to make multi-nationals “pay their share”.

He will no doubt be pleased by the ensuing headlines but I don’t think this rhetoric on its own will do much to improve Labour’s chance of a return to power in 2015.

The public will see it like they do banker bashing. They may agree with the sentiment but talk is cheap and not entirely convincing coming from Labour which toadied up to banks and business something rotten during the Blair/Brown years.

But what if Ed turned the issue into something more than speech-filler and put tax reform at the heart of his manifesto? Rather than promise a few tweaks to transfer pricing rules and an international conference, he could propose to scrap the bulk of company tax reliefs in return for halving the corporation tax rate to 10%.

Although the Treasury would lose out from a lower headline rate they would gain from the abolition of tax reliefs and, more importantly, remove any incentive multinationals have for funnelling profits abroad. Indeed the UK would gain from multinationals shifting revenues and profits in the opposite direction.

The knock-on benefits are potentially even more significant: more foreign investment in Britain, more home-grown start ups and billions saved in accountants’ fees.

And why stop at corporation tax? A similar, although somewhat trickier, deal is begging to be done on personal tax: simplifying the structure, perhaps including NI abolition, lowering marginal rates and abolishing reliefs. Tax receipts overall should hold up if enough new income is declared at the lower rates and the more efficient system feeds through to economic growth.

There’s a snag of course and that’s why it will almost certainly never happen.

Labour is traditionally dead-set against lower tax rates and made a lot of political capital by raising the top rate of income tax to a damaging 50% and calling the Coalition “the millionaire’s friend” when it partially reversed the rise. The left has never bought the argument about lower tax rates paying for themselves by reducing the incentive to avoid and boosting the economy.

But it’s the very unlikely nature of Miliband promoting such a policy that would make it a master stroke equal to anything Blair came up with. Tony was the master of stealing his opponents’ clothes.

When he adopted an apparently right wing policy he wrong-footed the Tories and used the resulting opposition from within his own ranks to his advantage. Standing up to his internal critics made him seem strong and non-partisan to moderate voters.

That’s exactly what Miliband needs to bury the Red Ed tag. Facing down some left-wing carping about tax cuts for the rich would do wonders for his standing with the majority of the country. He would also have a substantial economic policy which isn’t just about spending and borrowing more which would finally distance himself from the Brown legacy.

Most importantly he would sew dismay and discord in the Conservative ranks. They would be shorn of one of their key arguments (Red Ed’s is weak and has got nothing new) and the right wing of the party, including already wavering financial backers, would be further disillusioned seeing Cameron outflanked on their territory.

There are a myriad different ways of reforming the tax code on a lower-rates-less-breaks basis. Ed Miliband could pledge to do it in a more Labour-friendly way by focusing more on the closing of loopholes than the lower rates. But I don't suppose he will which is perhaps just as well because Labour's return to power would in general be a nightmare.